Insurance for Art Collectors Covers Ownership Disputes
It's a collector's nightmare:
You buy a valuable painting from a reputable dealer and hang it on your wall. Years later, you learn that the painting was once stolen, decades before you bought it. The original owner sues you, and before you know it you've both lost your investment and racked up tens of thousands of dollars in legal fees. You can sue your dealer to try to recover your loss, but that drags the legal mess out even longer.
Disputes over ownership of artworks are common, often protracted, and costly. Well-publicized cases involving theft and Holocaust restitution have drawn attention to the risks involved in not knowing every place your art has been. But collectors can find themselves dragged into court over less sensational issues, too. A dealer may have sold a work he didn't have the right to sell, or he may have failed to pay a consignor. Perhaps the seller of the artwork is an heir and, later, other heirs come forward to challenge his right to sell the piece.
A new insurance product, art title insurance, is meant to protect both buyers and sellers against these kinds of problems. At the moment, only one company, called ARIS, offers it. Founded by a lawyer and a former AON executive, ARIS has underwritten more than 300 policies since it started selling insurance in June 2006, covering works of fine art valued at between $20,000 and $4 million. (They do not offer insurance on antiquities.)
Like a real estate title insurer, ARIS both commits to defending the policy holder's title against any challenges and indemnifies the policy holder against his loss if a challenge is successful.
The primary difference between this and real estate title insurance is that there is no central registry of art transactions. So while a real estate title insurer only has to search the public records to underwrite a policy, ARIS has to comb the spotty (and sometimes intentionally obfuscatory) records and recollections of dealers, auction houses, and collectors. That partly explains why art title insurance is so much more expensive than real estate title insurance. With both types of insurance, a purchaser pays a onetime premium for a policy that lasts for the life of ownership. The chief executive of ARIS, Lawrence Shindell, said that so far, premiums have ranged from 1.75% to 6.75% of an artwork's value, depending on the risk. (Mr. Shindell declined to identify any particular works that ARIS has insured.) Real estate title insurance premiums vary by state; in New York, title insurance on a $1 million house costs roughly $4,500, or 0.45%.
An art lawyer, Thomas Danziger, who has done business with ARIS on behalf of a client, said he believes that art title insurance is a "terrific" idea, while noting that "[w]hether any single company survives and does well is hard to know." He and his partners in his law firm, Danziger, Danziger & Muro, thought several years ago of trying to offer title insurance, but they didn't have the time or resources to devote to it. "They clearly saw the opportunity here," he said of ARIS.
One recent high-profile title dispute involves a Norman Rockwell painting that the director Steven Spielberg purchased for $200,000 in 1989. In 1997, his assistant discovered that the FBI listed the work as having been stolen in 1968. Mr. Spielberg notified the FBI, which notified the owner of the painting at that time, who subsequently sued both Mr. Spielberg and the dealer who sold it to him. Although the dealer agreed to take the painting back, Mr. Spielberg is still trying to recover almost $50,000 in legal expenses from the dealer and the original owner, who themselves are still locked in a legal battle concerning the painting's ownership.
Where outright theft is not involved, courts generally find in favor of good-faith purchasers, but the legal defense can still be costly. In 2003, the collector Peter Brant was sued by a Swedish heiress, Kerstin Lindholm, regarding a Warhol painting called "Red Elvis." Ms. Lindholm claimed that the dealer who sold Mr. Brant the painting had misappropriated it when he was supposed to be merely transporting it for exhibition. Last year, a Connecticut court finally ruled that Mr. Brant is the painting's rightful owner because he bought it in good faith from a legitimate dealer — although the dealer himself was sentenced to three years in prison in Sweden for his conduct in the case.
When a potential client comes to ARIS to purchase insurance for a work they either own or are planning to buy, ARIS searches the public records for any liens against the work. It checks the artwork's stated provenance, which may contain gaps or outright fictions, Mr. Shindell said. ARIS may contact previous owners, press dealers for information, and in general "stress-test" the provenance, by making sure, for instance, that a gallery said to have owned the work at a certain time actually existed then and dealt in that artist's work.
Mr. Shindell declined to say how many staffers ARIS has doing this research, but said that they include people with backgrounds in law, insurance underwriting, and art history. He said that the process of underwriting takes an average of between two and three weeks, though ARIS hopes to make it more efficient as time goes on.
Because of the research ARIS does to ferret out potential title challenges, the fallout from the collapse of the Salander-O'Reilly gallery could have been prevented if all the buyers had purchased title insurance, the former speaker of the New York City Council, Gifford Miller, who now sells ARIS's policies in New York through a company called the Liberty Art Title Agency, said.
"In a world in which [purchasing title insurance] was adopted as a standard practice, it would be extraordinarily difficult for somebody like Mr. Salander to be successful at what he's alleged to have been successful at," Mr. Miller said.
And although it is often the buyer in a transaction who would purchase title insurance (or ask that the seller purchase it on his behalf), sellers may also have uses for it. Buying title insurance before putting a work on the market protects the seller against the chance that someone will come out of the woodwork with a claim — which is not uncommon if the work has not been for sale or on public view for many years.
This could be particularly important in the case of an estate that sells art at auction to pay estate taxes. If a claim subsequently emerges, the estate may not have the money to refund the purchase price, as the auction house would require it to do, but a title insurer would put up the money and then defend the title.
"In a world in which provenance — or, more precisely, title — is a real risk for collectors, there's a need for a product like title insurance to allow investors to protect their investment and ensure that their transactions are final," Mr. Gifford said.
Of course, there are skeptics. The author of the Art Law Blog, Donn Zaretsky, said in an e-mail that he would be concerned about what he called the adverse selection problem — namely, that "the people who buy the coverage are more likely to be people who have a reason to be concerned about possible defects in title (and may in fact be acting on information they have but the insurer does not)."
ARIS attempts to protect itself against this risk. It excludes from its coverage losses arising out of situations that the collector was aware of but did not inform ARIS about. It also excludes losses arising out of bankruptcy proceedings, Mr. Shindell said, because this is another avenue for potential fraud.
Still, the biggest challenge ARIS faces may simply be getting people in the art world to change their habits. An art lawyer at Flemming Zulack Williamson Zauderer, Dean Nicyper, said that he thought that title insurance, if widely adopted, would create more stability in the art market. But, he added, "people in the art world have a way that they've done business for years, and they have a difficult time adjusting to anything new."
In a sense, too, marketing title insurance involves calling people's attention to something they may prefer to ignore: namely, how difficult it is to determine the complete history of ownership of a work of art.
"Our job is, for better or for worse, to point out that the emperor has no clothes," Mr. Miller said. Still, he said, "I think it's inevitable that this gets adopted by both the auction houses and the vast majority of the legitimate art market. The question is how long it takes, and what is the pricing when it occurs."